Buying a new house is an exciting time! Whether it’s your first house, you’re upgrading to a larger home, or you’re downsizing, a new home can mean a fresh start for you and your family.
Before you start looking for your new home, make sure you have everything you need regarding your finances. You need to know where you want to live and have a list of your new-to-you house requirements. You also need to know how much money it takes to buy your next house.
How do you know if you have enough money? Unless you’re paying cash for the full listing amount, it can be a challenge to understand what you need to own a new home. Keep reading to learn how much money do you need to buy a house.
1. Determine Your Budget
How much money you need to buy a house depends on how much house your finances say you can afford. You don’t need a million dollars in cash to buy a million-dollar home, but you do need the finances to prove you can afford that much house.
Most people don’t cash-in-full for a new house. However, you need to make sure you don’t put yourself into a home that you can’t afford through your monthly mortgage payments.
So, how do you know your budget? Start with a loan pre-approval. The process of getting pre-approved for your loan helps you understand how to start looking for homes in your price range.
- Work with a mortgage broker or your financial planner to go through the pre-approval process. You don’t have to choose that broker for your final mortgage, but they can help you with pre-approval. If you aren’t able to get pre-approval, they’ll help you figure out how to improve your financial situation to succeed with pre-approval.
- With loan pre-approval, real estate agents are ready to start showing homes to you. Pre-approval proves that you’re a serious buyer and helps your real estate agent help you find homes in your price range.
To go through the pre-approval process, you’ll need bank statements, employment verification, and current income statements. You’ll also need to know how much you can put down for a downpayment.
2. Understand the Fees and Total Home Price
The listed sale price of a home is rarely the final amount you’ll pay for your new house. Buying a home is a process of paying fees, a downpayment, then your monthly mortgage payments.
Common Homebuying Fees
You’ll start paying for a house before you finalize the paperwork on the closing day. It can feel like everything in the home buying process has a fee associated with it, but remember that each step in the process is critical to making sure you buy a quality home at a price you can afford.
Homebuying fees and expenses can include:
- Loan application fees
- Earnest money
- Inspection and appraisal costs
- Credit report costs
- Recording and filing fees
All of these things add up, but you don’t want to skip anything essential to owning your next home. Skipping an inspection could mean you end up with mold problems in your new home.
One of the first checks you’ll write is for the earnest money deposit. Most agents recommend committing 1-2 percent of the listing price as your earnest money commitment toward buying the home.
Before you finalize the terms of your loan, you turn over a big check for the downpayment on your home. To qualify for a traditional home loan, you’ll need a downpayment of at least 20 percent of the home’s listed price.
However, if you can’t put down that much money, there are other types of home loans that don’t require 20 percent. FHA mortgages are an excellent option to put less money down up front, but you’ll pay a higher interest rate on the loan amount.
If you want to lower your interest rate over the term of your mortgage, save more money to put toward your downpayment.
3. Be Prepared for Closing Costs
In most cases, buyers pay the closing costs on the sale of a home. These costs are usually between 2-5 percent of the total cost of your home. Before you finalize closing costs, make sure you understand everything that rolls into the amount you’ll pay.
Closing costs include many smaller fees that are part of approving the purchase of your new home. These fees can include:
- Attorney fees
- Agent commissions
- Document fees
- Notary fees
- Title fees
- Underwriting fees
Instead of writing small checks for each of these fees, your closing costs combine these fees (and more) into one payment. Come prepared to pay closing costs using a cashier’s check when you close on the house.
4. Get Ready for Your First Mortgage Payment
You’ll hand over a lot of money on the closing day for your new home. About a month later, you’ll start paying your first monthly mortgage payments.
Make sure you didn’t expend all of your cash on the closing day. Some lenders require proof of cash reserves before finalizing your loan. With a new mortgage payment, you have an ongoing addition to your monthly budget for the 15-, 20-, or 30-year term of your loan.
A new house and a mortgage are significant commitments. The day you get the keys to your new home is the first day of a long-term financial commitment that you must honor every month.
How Much Money Do You Need to Buy a House? It Depends!
“Enough” is the short answer to the question of “how much money do you need to buy a house?” The house you can afford depends on how much money you save for a downpayment and how much your finances allow you to pay toward your mortgage each month comfortably. Use the information in this article to budget for your downpayment, earnest money, and closing costs to being your life in a new home!
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